Tag: LLC member liability

Stipulation In Earlier Case Subjects LLC Member to Unjust Enrichment and Constructive Trust Judgment in Check Cashing Dispute – IL 1st Dist.

In a densely fact-packed case that contains an exhausting procedural history, the First District recently provided guidance on the chief elements of the equitable unjust enrichment and constructive trust remedies.

National Union v. DiMucci’s (2015 IL App (1st) 122725) back story centers around an anchor commercial tenant’s (Montgomery Ward) bankruptcy filing and its corporate landlord’s allowed claim for about $640K in defaulted lease payments.  In the bankruptcy case, the landlord assigned its approved claim by written stipulation to its lender whom it owed approximately $16M under a defaulted development loan.

The bankruptcy court paid $640K to the landlord who, instead of assigning it to the lender, pocketed the check.  The lender’s insurer then filed a state court action against the landlord’s officer (who deposited the funds in his personal account) to recover the $640K paid to the landlord in the Montgomery Ward bankruptcy.  After the trial court granted summary judgment for the plaintiff on its unjust enrichment and constructive trust counts, the defendant appealed.

Affirming the trial court’s judgment for the plaintiff, the First District first focused on the importance of the stipulation signed by the landlord in the prior bankruptcy case. The court rejected the landlord’s argument that his attorney in the bankruptcy case lacked authority to stipulate that the landlord would assign its $640K claim to the plaintiff’s insured (the lender). 

A stipulation is considered a judicial admission that cannot be contradicted by a party.  But it is only considered a judicial admission in the case in which it’s filed.  In a later case, the earlier stipulation is an evidentiary admission that can be explained away.

The law is also clear that a party is normally bound by his attorney’s entry into a stipulation on the party’s behalf. This holds true even where the attorney makes a mistake or is negligent.  Where an attorney lacks a client’s express authority, a client is still bound by his attorney’s conduct where the client fails to promptly seek relief from the stipulation. To undo a stipulation entered into by its attorney, a party must make a clear showing that the stipulated matter was untrue. Since the landlord failed to meet this elevated burden of invalidating the stipulation, the court held the landlord to the terms of the stipulation and ruled that it should have turned over the $640K to the plaintiff.

Unjust Enrichment and LLC Act

Next, the court examined the plaintiff’s unjust enrichment count. Unjust enrichment requires a plaintiff to show a defendant retained a benefit to plaintiff’s detriment and that the retention of the benefit violates basic principles of fairness. Where an unjust enrichment claim is based on a benefit being conferred on a defendant by an intermediary (here, the bankruptcy agent responsible for paying claims), the plaintiff must show (1) the benefit should have been given to the plaintiff but was mistakenly given to the defendant, (2) the defendant obtained the benefit from the third party via wrongful conduct, or (3) where plaintiff has a better claim to the benefit than does the defendant. (¶ 67)

Scenario (1) – benefit mistakenly given to defendant – clearly applied here. The bankruptcy court agent paid the landlord’s agent by mistake when the payment should have gone to the plaintiff pursuant to the stipulation.

The court also rejected defendant’s claim that he wasn’t liable under the Illinois LLC Act which immunizes LLC members from company obligations.  805 ILCS 180/10-10.  However, since plaintiff sued the defendant in his individual capacity for his own wrongful conduct (depositing a check in his personal account), the LLC Act didn’t protect the defendant from unjust enrichment liability.

Constructive Trust

The First District then affirmed the trial court’s imposition of a constructive trust on the $640K check.  A constructive trust is an equitable remedy applied to correct unjust enrichment. A constructive trust is generally created where there is fraudulent conduct by a defendant, a breach of fiduciary duty or when duress, coercion or mistake is present. While a defendant’s wrongful conduct is usually required for a court to impose a constructive trust, this isn’t always so. The key inquiry is whether it is unfair to allow a party to retain possession of property – regardless of whether the party has possession based on wrongful conduct or by mistake.

Here, the defendant failed to offer any evidence other than his own affidavit to dispute the fact that he wrongfully deposited funds that should have gone to the plaintiff; the court noting that under Supreme Court Rule 191, self-serving and conclusory affidavits aren’t enough to defeat summary judgment. (¶¶ 75-77)

Take-aways:

This case offers a useful synopsis of two fairly common equitable remedies – unjust enrichment and the constructive trust device – in a complex fact pattern involving multiple parties and diffuse legal proceedings.

The case makes clear that a party will be bound by his attorney’s conduct in signing a stipulation on the party’s behalf and that if a litigant wishes to nullify unauthorized attorney conduct, he carries a heavy burden of proof.

 

 

 

 

LLC Members Not Liable On Void Judgment Entered Against LLC

Downs v. Rosenthal, 2013 IL App (1st) 121406, features an in-depth analysis of the difference between corporate vs. individual liability, the nature of post-judgment proceedings, and appellate procedure.

Facts

Plaintiff sued defendant LLC and its individual members (the Members) for breach of fiduciary duty, breach of contract and a declaratory judgment that plaintiff was a 2.5% stakeholder in the LLC.  The trial court entered a money judgment against the LLC and Members jointly and severally.  The LLC defendant appealed the judgment but the Members did not.

The First District reversed and vacated the judgment, finding that plaintiff wasn’t an owner of the LLC and so wasn’t entitled to a share of the LLC’s profits.  But since the Members didn’t appeal the judgment, plaintiff instituted supplementary proceedings against them.  The trial court quashed the citations because the appeals court reversed the plaintiff’s judgment. Plaintiff appealed.

Held: trial court affirmed.  The voided judgment against the LLC is not enforceable against the Members.

Rules:

The LLC appealed – but the Members didn’t – the trial court’s ruling that plaintiff was entitled to 2.5% of the LLC’s profits over several years.  Usually, a nonappealing defendant can’t benefit from the efforts of an appealing defendant.   ¶ 20.

But the defendant that doesn’t appeal can benefit from a co-defendant’s successful appeal where there is an “interdependence of rights” among them that would make it unfair to allow a judgment to stand against the no appealing defendants. ¶¶ 20, 24.

The plaintiff’s right to the LLC profits was entirely dependent on his ownership interest in the LLC.  Since the appeals court found that plaintiff was not an owner of the LLC, plaintiff wasn’t entitled to any LLC profits.

In Illinois, an LLC is a separate entity from its constituent members and an LLC member or manager is not personally liable for a judgment against the LLC. 805 ILCS 180/10-10(a).  Once the judgment against the LLC was overturned, there was nothing to bind the Members: the Court found it was unfair to allow the plaintiff to enforce the vacated judgment against the Members.   ¶24.

The First District also rejected plaintiff’s res judicata (“a thing already judged”)argument – that the judgment which the Members didn’t appeal was final and so the Members were barred from challenging plaintiff’s attempt to collect on the judgment.

Res judicata, or claim preclusion, attempts to foster closure and finality in litigation.  The doctrine applies where there are successive causes of action and it bars a second action between parties after a previous final judgment on the merits.  It requires (1) a final judgment on the merits; (2) identity of causes of actions; and (3) identical parties in both actions. ¶ 25.

Here, the Court found that plaintiff’s enforcement proceedings were “supplementary” to the underlying judgment and were not, by definition, a second cause of action.  There was only a single action – plaintiff’s lawsuit.  As a result, the Court found that the Members could properly attack the plaintiff’s post-judgment efforts once the appeals court vacated the judgment against the LLC.  ¶ 26.

Take-aways: A defendant that doesn’t appeal a judgment can still benefit from a co-defendant’s successful appeal where there is an interdependence of rights between the two defendants.

However, Downs shows that it’s a perilous practice for one defendant not to appeal a money judgment when his co-defendant does appeal.  In Downs, while the LLC members ended up winning, they ran the risk of having to answer for a judgment that was entered against another party (LLC) and ultimately overturned.

Downs also illustrates that a judgment creditor’s collection proceedings aren’t viewed as separate claims for res judicata purposes.